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P&G Makes a Good Covered Call Package

A covered call strategy on a stable firm like P&G can play out well for investors.

Erik Kobayashi-Solomon, 07/21/2011

Covered calls can be an intelligent options strategy to invest in a strong, stable company like Procter & Gamble PG. Despite what you may have heard about covered calls, in essence, the strategy means you end up accepting the downside risk of the underlying stock. Given P&G's strong balance sheet, stable, differentiated business, and international exposure, we think the downside risk is very low. If the options market is willing to pay us good money to accept that risk, we'll be happy to bank it!

We like the calls struck at $65 expiring in January 2012, for which an investor can receive $2.19 per share in option premium (click here for Morningstar.com's option prices for P&G). In order to execute this investment, you would buy 100 shares of P&G at the present market price of $64.78 and sell 1 call option contract struck at $65 per share (one option contract is worth 100 shares of stock). If the shares are trading above $65 in January 2012, you have received $2.19 of premium and $1.05 of dividend payments, as well as a capital gain of $0.22 ($65.00 - $64.78) for a total dollar return of $3.46 per share on the investment.

If the shares are trading below $65 at expiration, you own the shares for an effective buy price of $61.54 ($64.78 - $3.24)--just below Morningstar's consider buying, 5-star price!

For more information regarding covered calls, please listen to a replay of our recent webinar entitled "Covered Calls A to Z".


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